Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Income — Rental and Schedules K-1

Rental Income and Expenses

Rental Income

Generally, renting a room or a home to a tenant is rental income reportable on Form 1040, Schedule E. U.S. citizens and resident aliens must report rental income, regardless of whether the rental property is located in the U.S. or in a foreign country. Gross rental income may include other payments in addition to the normal and ordinary rents received, such as:

  • Advanced rent
  • Security deposits
  • Payments for breaking a lease
  • Expenses paid by the tenant
  • Fair market value of property or services received in exchange for rental payments

Remember to include these additional payments in the taxpayer's gross rental income.

Tip

The security deposit is not included in income when the taxpayer plans on returning the deposit at the end of the lease. However, if the security deposit is intended to serve as the last month's rent, then it should be included in income.

Caution

Property must have been rented at fair rental value. If a property is rented at less than fair rental value, the income and expenses are reported in a different manner than discussed in this lesson. Refer taxpayers who rent their property at less than fair rental value to a professional tax preparer.